People tempted by companies into leaving their generous final-salary pension scheme for cash lump sums could seriously be out of pocket come their retirement. Steve Webb, the Pensions Minister, has stated that he is extremely anxious about reports of people being offered cash bribes to downgrade or move their pension schemes.
The incentivised transfers involve clients being offered a short-term cash benefit, often of a few thousand pounds, to transfer their pension rights away from their final-salary scheme into a defined-contribution scheme instead or give up their inflation protection.
The new defined-contribution schemes won’t guarantee how much a pension will be at retirement, instead they promise to make set contributions which leave the investor to take all the financial risks that come with a volatile market.
“This can look like a good deal when you are offered a cash lump sum, but people forget they will be retired for 20 or 30 years – compound interest means their pension could fall by a quarter or more if they give up inflation protection,” Mr Webb said.
Workers will also have to use the sums they build up in their defined-contribution schemes to buy annuities when they retire. At the minute annuity rates are at record lows so people will need to save a lot more to buy their annuities than they would do if they were still in a final-salary pension scheme.
The Minister warns that people are expected to be retired for 24 years, and that one in six people will live until they are 100. Transferring to an inferior pension scheme now for a few thousand pounds could cost them dearly if they have a long retirement.
Mr Webb said: “We urgently need to make sure that we root bad practice out of the market. The industry can’t go on offering superficially attractive deals to people that ultimately leave them badly out of pocket.
A round-table event is being held today, and is to be attended by members of the pensions industry along with the Pensions Regulator in an attempt to stamp out the practice.
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